Tag Archives: gold

(This article is the third in a series on bitcoin. Read parts 1 and 2 here and here.)

With bitcoin gaining mainstream attention the coming attack on its users is inevitable. In this short piece I will explain how it is likely to unfold and how you can survive it.

First, a little background:

In 1996 E-gold was one of the early entrants to the market with a private, global e-currency. They achieved stellar growth and widespread attention – much like bitcoin today. Accolades came from freedom-lovers everywhere. They were the “Great Gold Hope” that would free the people by freeing the money. Privacy-enthusiasts, libertarians, gold-bugs, autarchists, anarchists, voluntaryists, drug-dealers, and even unsavory types flocked to it with praise and adoration.

Of course, the monopolists of the monetary system didn’t take lightly to this threat to their very existence. They came after the independent exchangers and e-gold with their full force and fury – eventually succeeding in convicting the key players for “conspiracy to operate an unlicensed money-transmitting business” and “conspiracy to engage in money laundering”. E-gold was fairly easy to take down because their operations and data-center were centralized and readily accessible.

Many folks who are now currently acting as currency exchangers for bitcoin will be the first to come under attack. Many will get hurt and possibly even imprisoned but, because of its decentralized nature, bitcoin will survive where e-gold did not.

If any of the large exchangers like mtgox.com are operating out of the US then it won’t be long before they are raided and shut down. Individual exchangers will be targeted as well – just to make an example and to scare others out of the community. This will create a giant “wet blanket” on the current enthusiasm for bitcoin and I expect the currency to take a major drop in exchange value when this happens. Not to fear though. Bitcoin will survive due to its decentralized “peer to peer” nature and it will continue to operate as an “alter-cash” resuming its growth albeit at a slower rate during the immediate aftermath.

To protect yourself I recommend the following:

You probably have a little more time before the attacks come (maybe a couple of months?) to acquire bitcoin with cash – and there are profits in speculation to be made until then but, when the raids come, expect a sharp correction before exchange values move on to new highs over a longer period of time. What you do not want to do is be involved as an “exchange service” conducting exchanges in and out of national currencies and you definitely do not want to have your money sitting in the exchanger’s account when they are raided and shut down.

Remember, e-gold was shut down for “conspiracy to operate an unlicensed money transmitting business”. Do not store any money in online accounts like mybitcoin.com in case they get taken down along with the exchangers. Keep all of your bitcoins on your computer with multiple, encrypted back-ups both on the cloud and on an external thumb drive.

The safest way to acquire bitcoin is to let people know that you will accept it as payment for your products and services. Do not ever exchange it for national currencies. The point that people miss here is that national currencies are the very problem that freedom-lovers are trying to get away from. Instead, use bitcoin to trade with merchants and individuals who accept it as payment. Offer it as payment to those who are unaware of it and explain the benefits to them. This will help develop the market and create a solid economy outside of national currencies. After the initial attack, bitcoin will likely be one of the most powerful and revolutionary tools to bring about more freedom and liberty to humankind.

Weak Link #1: The exchange services who convert common currencies into e-currency and vice versa.

Weak Link #2: The e-currency must be defensible and the asset which backs the e-currency must be verifiable (technically this is two more weak links bringing the total to 3; in my haste, I neglected to separate these so I make note of that here).

Primary Problem: The lack of understanding of property rights and individual liberty in a sufficient number of people to enable them to come to each other’s mutual defense.

In conducting further research on Bitcoin it is interesting and encouraging to see how it is addressing these issues. While I am no expert on Bitcoin I will do my best to touch on how it and its users are tackling the issues I describe above.

First let us discuss the qualities of an “ideal money” (see What is Money?):

Let us now compare how Gold and Bitcoin stack up against each other in each of these areas:

Scarcity

The supply of gold is regulated by nature. The supply of Bitcoin is limited by its configuration.

Durability

Gold does not decay or rot. With proper back-up and storage, neither can Bitcoin.

Fungible

Both gold and Bitcoin can be divided into very small quantities but Bitcoin is the clear winner here because its cost of division is close to zero.

Portable

Due to their concentrated value both gold and Bitcoin are highly portable but Bitcoin is the clear winner since wealth can be transferred across the globe with the click of a mouse.

Proven

Gold has a 6,000 year history as a proven form of money but it has also proven its weakness since it has been driven out of the monetary system through many periods of history including the present time. Bitcoin has been in existence only a short time and has yet to prove itself over long periods of time.

Use Value

Gold has many uses in industry – over and above its usefulness as money. Bitcoin’s primary use value is as a medium of exchange. Time may prove that the degree of Bitcoin’s usefulness as a medium of exchange outweighs it’s lack of usefulness in other areas.

Defensibility

Gold, due to its physical nature, is expensive and difficult to store and defend. Bitcoin is easy and inexpensive to store. The degree to which Bitcoin can be defended will continually be tested but the outlook is hopeful. There is no such thing as 100% protection for any asset but one can take actions to minimize risks. The cost to benefit ratio must always be considered.

The assets created and known as Bitcoin have unique qualities in that:

They are created electronically and exist in a distributed and decentralized fashion across multiple computers across the internet. With no central storage location they become much less susceptible to confiscation by invading armies. A powerful feature indeed.

They are created or “mined” by complex computational problems which regulates the rate of their creation and limits the ultimate supply giving them an anti-inflationary nature which is one of the main characteristics of a desirable money.

Conclusion

Overcoming Weak Link #1: If there is a ready market of willing trading partners, there really is no need for Bitcoin to be exchanged for fiat currencies. Since fiat currencies primarily act as a medium of exchange (a means to trade what you have for what you want), Bitcoin can simply be traded directly for the goods and services of willing trading partners bypassing the need for currency conversion. A growing market of willing trading partners strengthens the value of Bitcoin and reduces the dependency on fiat currencies.

Overcoming Weak Links #2 and #3: There is no asset backing Bitcoin. Bitcoin is itself the asset. Its greatest value is as a medium of exchange. The fact that it is decentralized makes it extremely difficult to confiscate. Hence, it is highly defensible.

Bitcoin is a promising tool in the struggle for individual liberty. In order for life-protecting tools like Bitcoin to have continued success there must be a sufficient number of people who have a clear philosophy of what Liberty is and what it means (see My Philosophy of Liberty) and they must act consistently within this philosophy (see A Way To Be Free). They must respect the property rights of others. This is called Autarchy.

I wanted to post some brief comments to let some of the newer readers understand why many of us believe that there is a war being waged upon gold by the Central Banks of the West.

Let me start this off by quoting from none other than former Fed Chairman Alan Greenspan more than 40 years ago:

In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. … This is the shabby secret of the welfare statists’ tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists’ antagonism toward the gold standard

What the former Fed Chairman was then saying was that absent a gold standard or some device for restraining the unlimited creation of fiat money, there was nothing to impede monetary officials from engaging in such activity to the extent that it would ultimately set in motion a process of inflation, which is really just another name for the erosion of the purchasing power of a nation’s currency by debasing it. Inflation was and is in essence, the transfer of wealth from one class to another.

Today we have the Fed engaging in the very process that Greenspan warned against back then. We also have the BOJ and the ECB effectively doing the same thing to an extent.

Unlike Silver, Gold is the main metal that most analysts and commentators look to when attempting to decipher whether or not inflation is a serious problem. That means the reference point of gold has become a target for Central Banks which want the world to believe that they can create unlimited amounts of funny money with absolutely ZERO impact on inflation levels. In other words, that they can conjure up wealth and produce prosperity with the electronic equivalent of a printing press and produce no serious inflationary impact by so doing.

A rising gold debunks their hubristic assertions to the contrary for it stands as a silent witness testifying against them. This is the reason the yellow metal is despised by so many Central Banks. It mocks their policies and displays their folly for all the world to see. Central Bankers, being the demigods that they are, will tolerate no rivals to their claims of economic omniscience. You see they have actually come to believe that it is their own wisdom and foresight which enables them to see through the fog that hinders and impedes our economic progress and that they are in a unique position to provide the rest of us with lasting prosperity. They attempt to do this by basically providing or withdrawing liquidity as they in their wisdom judge best and by the setting or manipulation of interest rates.

Those of us who believe that it is free market capitalism and the industry and efforts of mankind that produce wealth and prosperity would beg to differ but that is another story altogether. I would add that it is my opinion that the world would be better off without this plague of locusts that actually devour a nation’s wealth but the fact is that they are here.

While they are here gold will attempt to move in such a manner that it either blesses or curses their policies. Now we all would love to have our policies approved by the vote of the market but what about those times in which the market frowns on our course of action and refuses to smile upon it? Why this is but a simple matter – attack the messenger! If one can somehow manage to keep the price of gold under wrap so that it does not move sharply higher then one can attempt to make the claim that inflation is not a serious problem. The comments usually go something like this:

“Well Jerry, we are looking at the gold price and from what we can see, that while it is definitely higher, it is not soaring out of control. The market may be pricing in some gradual inflation but the action in the gold price is telling us that any fears of inflation getting out of control are definitely unwarranted. Besides, we all agree that some inflation is a good thing because the alternative is deflation and no one wants to see that”.

Imagine Fed Chairman Ben Bernanke testifying before Congress saying that the current rise in prices of many goods is only “temporary” and “relatively modest” if the gold price were soaring beyond $1650 and higher! Do you think anyone would take anything that the Chairman said seriously? Copper can soar higher and most will not notice it. Even if it does, it is generally explained as a positive because we are told it is a sign of strong economic growth ahead. Crude oil and energy prices can rocket higher and that can be attributed to geopolitical unrest among oil producing nations. Food can rise sharply and everyone notices that but such things are often explained away by citing weather conditions, supply constraints, etc. but a rising gold price? How does one explain that away?

The only reason that gold has a sustained price rise is because of a lack of confidence in the monetary system. It does not rise sharply because of such things as jewelry demand or industrial demand – it rises when fear, distrust, doubt, suspicion and uncertainty over Central Bank policy reigns. It rises when REAL interest rates are negative and investors understand the insidious process of currency debauchment practiced by these monetary authorities is underway. It thus cries aloud and issues a warning to those who can hear it and what it shouts displeases many Central Bankers because they are among those who while they despise its message, are all too keenly able to hear that message.

Thus the messenger, the prophet, the oracle, must be silenced or at the very least, his message blunted, toned down, marginalized, trivialized by whatever means possible. The mechanism employed to do just this is a subject for another time and place. Suffice it to say for now, without the efforts by the monetary officials of the West to discredit gold, it would be trading considerably higher. Even at that however, the ancient metal of kings refuses to go quietly and docilely into the night. It will yet have the final say.

It may not fold as conveniently as dollar bills, but the Utah House took a first step Friday to recognize gold and silver as legal tender.

It voted 47-26 to pass HB317 by Rep. Brad Galvez, R-West Haven, and sent it to the Senate. The measure would recognize as legal tender gold and silver coins issued by the federal government — not just their face value, but also their value in gold and silver or to a collector.

It also would order the state to study whether Utah should establish an alternative form of legal tender, such as one backed by silver and gold.

“This is a step in preparedness, a step in security,” Galvez said, “that allows us to be able to help hold up our economy as the dollar continues to shrink.”

Rep. Ken Ivory, R-West Jordan, said, for example, that a 1960s John F. Kennedy half-dollar coin — 90 percent silver — would have bought three gallons of gasoline with its face value in the mid-60s. But the value of the silver in it today would buy about five gallons of gas, while the face value of the coin would buy only a fraction of a gallon.

Ivory said the bill is “a way for us to preserve for the citizens of Utah … the purchasing power of the money they hold.”

The bill would not require anyone to accept gold and silver coins as legal tender. It also would exempt the sale of such U.S. coins from state sales taxes and from capital-gains taxes.

Rep. Steve Eliason, R-Sandy, a certified public accountant, opposed the bill, saying it could create tax loopholes. He said people seeking to escape capital-gains taxes on other assets — such as gold bullion — might be able to do so by selling it for coins under the bill.

It’s been nearly 80 years since the U.S. stopped using gold coins as legal currency, and nearly 40 since the world abandoned the gold standard, but the precious metal could be making a comeback in the United States — beginning in Utah.

The Utah House was to vote as early as Thursday on legislation that would recognize gold and silver coins issued by the federal government as legal currency in the state. The coins would not replace the current paper currency but would be used and accepted voluntarily as an alternative.

The legislation, which has 12 co-sponsors, would let Utahans pay their taxes with gold and also calls for a committee to study alternative currencies for the state. It would also exempt the sale of gold from the state capital gains tax.

The bill cleared a state legislative committee on Wednesday, the first of 13 similar bills in statehouses across the country to do so. If the bill clears the House, it would have to pass the Senate before the governor could sign it into law.

Attorney and Tea Party activist Larry Hilton, author of the original bill, said he doesn’t foresee any roadblocks.

“There’s enough uneasiness going on in the economy to trigger people to feel that, hey, having a little Plan B, kind of a backup system, is not a bad idea,” he told FoxNews.com.

The U.S. used some version of the gold standard from 1873 until 1933, when President Franklin D. Roosevelt outlawed the private ownership of gold amid the Great Depression. An international monetary system based on a gold-exchange standard continued until 1971 when President Richard Nixon stopped the U.S. from redeeming dollars for gold altogether.

Critics of the gold standard say it limits countries’ control over its monetary policy and leaves them vulnerable to financial shocks, such as the Great Depression. But supporters argue that the current financial system’s dependence on the Federal Reserve exposes the value of U.S. money to the threat of inflation.

Rep. Ron Paul, a longtime critic of the Federal Reserve who has called on a return to the gold standard, has praised Hilton’s efforts.

“Efforts such as yours in states around the country highlight the importantance of returning to sound money,” Paul wrote in a letter to Hilton. “Even if such efforts fail to achieve legislative success on their first try, their importance lies in bringing to the public’s attention the problem of the ever-weakening dollar and the necessity of returning to a sound monetary system.”

Hilton said the bill before the House doesn’t go as far as his original draft, which was more sweeping, including recognizing more than just U.S. minted coins and more details on specific tax treatment. But he said he’s willing to take it step-by step.

He also said he’s not pushing to restore the gold standard in the U.S.

Federal Reserve Chairman Ben Bernanke this week dismissed the notion of the gold standard returning to the U.S.

“It did deliver price stability over long periods of time, but over shorter periods of time it caused wide swings in prices related to changes in demand or supply of gold,” he told the Senate Banking Committee. “So I don’t think it’s a panacea.”

Bernanke also said that gold couldn’t return as the world standard because there’s not enough gold in the world to effectively support the U.S. money supply.

Hilton said he’s taking a positive approach to the issue.

“This is not an anti-dollar issue at all,” he said. “We want to strengthen the dollar. We think by introducing gold and silver of our nation’s history, by injecting that into the debate is very healthy for our policymakers.”

Jeff Bell, a policy director for the Washington-based American Principles in Action (APPIA), which helped shape the Utah bill, told FoxNews.com that passage of the bill would send a message to Washington and other states.

“People sense that in the era of quantitative easing and zero interest rates, something has gone haywire with our monetary policy. But people are afraid to say it,” said Bell, who was an adviser to Ronald Reagan’s 1976 and 1980 presidential campaigns. “If one state recognizes gold as a valid currency, I think it would embolden people not just in other states but in Washington.”

Bell credited Tea Party activists for advancing the legislation this far. Rep. Brad Galvez, who introduced the legislation, is a freshman legislator backed by the Tea Party.

“Saying we now recognize gold as money is a big step forward,” he said.

Twelve other states have offered similar proposals: Georgia, Montana, Missouri, Colorado, Indiana, Iowa, New Hampshire, South Carolina, Tennessee, Washington, Vermont and Oklahoma.